چکیده انگلیسی

This paper assesses the cost-effectiveness of the performance standard system to reduce CO2 emissions. Simulation results suggest that this instrument could reduce emissions with almost the same productive efficiency as a permit-trading system. As it does not raise the prices of commodities relative to that of labour, it introduces fewer distortions in labour supply decisions. The results also suggest that the performance system standard could be better than a permit-trading system at avoiding carbon leakage. However, as its information and monitoring costs could be large, a restricted application to some industries may be worth considering when the feasibility of a market-based instrument is uncertain.

مقدمه انگلیسی

Concerns about the warming of the climate have led the international community to find ways to curb emissions of greenhouse gases (GHG) into the atmosphere. In December 1997, Canada, along with 37 other countries (Annex-B countries), signed the Kyoto protocol on the limitation of the anthropogenic emissions of GHG. Canada agreed to reduce its carbon-dioxide-equivalent GHG emissions to 6% below its 1990 level, between 2008 and 2012. In this study, we analyse the cost-effectiveness of an alternative policy instrument to comply with the Kyoto protocol in Canada. We consider the use of a performance standard system to reduce carbon dioxide (CO2) emissions.
The choice of a policy instrument to control pollution depends on several considerations: cost-effectiveness, administrative ease and monitoring costs, distributional issues, and political feasibility. Market-based instruments, such as carbon tax and tradeable carbon permits, have often been preferred by economists for reducing pollution since they can help achieve the target in a cost-effective manner. However, the optimal composition of the policy instruments in a given country depends on its socio-economic, cultural and political setting. In some cases, the feasibility of a market-based instrument may be hampered by many factors, among which its uneven sectoral distribution and its adverse effect on labour supply decisions. By raising the costs of energy inputs, market-based instruments have, among others, two undesirable effects on the economy. They harm the competitiveness of carbon-intensive industries and tend to raise the cost of goods produced relative to that of labour. Consequently, they introduce some distortions in the labour supply decisions and thereby on output supply. These costs may not be completely offset by using the revenue they raise to reduce pre-existing distortionary taxes.1
Over the last four years, several papers have investigated the potential economic impacts of Canada's compliance with the protocol. Some of the recent contributions on the subject, using computable general equilibrium (CGE) models, are ab Iorwerth et al. (2000), Dissou et al. (2002), and Wigle (2001). Using a market-based policy instrument, namely a carbon permit system, all these studies have found that complying with the protocol will have a negative impact on aggregate output and in particular in carbon-intensive downstream industries.
While this approach is a good start, it needs to be extended to account for alternative ways of reducing emissions. Referring to Goulder (2000), enhancing the political feasibility of the GHG emissions reduction may require addressing these undesirable effects of the carbon permit scheme. In this regard, the desirable policy instrument must avoid raising the cost of energy products, while at the same time reducing the level of pollution emissions. Some papers like Bernard et al. (2001), Fischer (2001), Goulder et al. (1999), and Fullerton and Metcalf (1997), among others, have begun to expand the set of pollution reducing policy instruments by analysing the efficiency costs of some types of regulatory approaches.
One of these regulatory approaches is the performance standard on emissions. According to this approach, the regulator sets an upper bound on allowable level of CO2 emissions per unit of output, i.e., on allowable emissions intensity. Firms are compelled to reduce their emissions intensity.2 Compliance may be achieved either through investment in new equipment or through substitution away from fossil fuels. An interesting characteristic of the performance standard is that it does not raise the cost of energy inputs and therefore does not introduce the above-mentioned distortion of the market-based instrument. Still, if this regulatory approach can be effective in reducing emissions of CO2, it may be at the expense of cost-effectiveness. Indeed, the marginal costs of abatement may not be equalized among emissions sources. However, the regulator can in theory determine a cost-effective allocation of emissions-intensity targets so as to equate the marginal costs of abatement across emissions sources.3 As with another market-based instrument—the carbon tax—the performance standard cannot achieve its target reduction with certainty.
Our objective in this paper is to analyse the aggregate and sectoral impacts of complying with the protocol, by broadening the range of CO2-reducing policy instruments. Using a static and multi-sector general equilibrium model, we analyse and compare the cost-effectiveness of a performance standard system and a carbon permit scheme to reduce CO2 emissions in Canada.4 We restrict our attention to the efficiency costs of the two instruments and therefore abstract from other considerations that may affect the choice. We assume that firms comply with performance standards through substitution effects. Furthermore, to address a frequent criticism of CGE models with regards to non-estimated elasticity parameters, we provide the results of some sensitivity analyses of the extraneous behavioural parameters used in the model. To the best of our knowledge, this is the first work in Canada that provides a comprehensive sensitivity analysis of elasticity parameters in the study of the potential impact of the Kyoto protocol.
The remainder of the paper is organised as follows. The next section presents the model, including a discussion on the modelling of firms’ behaviour in a carbon permit system and in a performance standard system. We discuss the data, the calibration and the numerical solution strategies in the third section. Section four analyses the simulation results and section five provides some concluding remarks.

نتیجه گیری انگلیسی

Market-based instruments have often been preferred by economists for achieving environmental goals, as they can help achieve the emissions target reduction in a cost-effective way. However, in some contexts, their undesirable effects may impede the political feasibility of these instruments. This paper has employed a static, 61-multi-sector, general equilibrium model to assess the cost effectiveness of a regulatory approach—the performance standard system—to reduce carbon dioxide emissions in Canada in a second-best setting.
Our simulation results suggest that the performance standard system can achieve almost the same productive economic efficiency as a carbon permit scheme where the proceeds of permit sales are used to reduce the tax rate on primary factor income. This result arises because, in contrast to a market-based instrument, the performance standard system does not raise the prices of commodities relative to that of labour. As a consequence, it does not increase distortions in labour market decisions and thereby on output. Our results also highlight the importance of revenue recycling in a carbon permit scheme. While we have not found any evidence of the existence of double dividend, our results show that using the permit revenue to reduce pre-existing distortions on primary factor decisions may lessen the negative impact of the compliance with the protocol on GDP at market price. Our results also suggest that the performance standard system does less harm to the competitiveness of carbon-intensive industries, in comparison to the carbon permit schemes, because the performance standard does not raise their production costs. However, households undergo larger welfare deterioration in the performance standard system. The reasons for this are because, in comparison to both carbon permit schemes, households: (1) do not decrease significantly their leisure time in the performance standard; (2) do not receive any lump-sum transfer of permit revenue; and, (3) do not benefit from an income tax relief.
Finally, we should mention that our analysis focuses on efficiency issues and abstracts from the monitoring costs of implementing the performance standard system. These costs may be high enough to change the above-presented ranking of the effects of these instruments on production. In particular, non-tradable performance standards could forego efficiency gains when costs among firms in a given industry are heterogeneous. In addition, because of the informational problems related to the setting of sectoral emission intensities, the relative efficiency of performance standards in a multi-sector context depends on how well marginal costs are equalized across sectors and on how well the implicit output subsidies are balanced. Should these emission intensities be set sub-optimally, the efficiency of performance standard would thus be reduced. Still, our results are an indication that a restricted application of the performance standard system to some industries may be an option worth considering in the absence of any other desirable and politically feasible environmental policy instrument.